Option Flow Summary and Unusual Activity Alert: Yahoo Inc (YHOO) & Sovereign Bancorp (SOV)
General Sentiment
It is an interesting day as the major merger news is tempered by weak employment numbers. While not near the levels indicated by pre-open trading, broad averages are up nearly 1% by mid-afternoon, and the CBOE VIX is down nearly 2 points to the 24.40 range.
Overall volume is a bit shy of recent levels, with call trading leading puts by more than 1 million contracts in mixed trading.
Yahoo Inc YHOO $28.26 +47.34%
MSFT’s bid has resulted in a massive gain for Yahoo shareholders, with interesting implications for options portfolios. The mixed cash and share-tender terms have caused Yahoo options to lose a great deal of extrinsic value.
Conversion into MSFT options implies much lower expected volatility than usual for Yahoo. For example, a timely buy of 10,000 July 32.5 calls yesterday on the PHLX near the end of the day for $.22 has not resulted in windfall gains.
The volatility drop counteracts nearly all of the delta increase, leaving the buyer with about an $.80 per contract gain. Had the buyer focused on Feb 22.5 calls, trading near $.11 the gain would be nearly $5.90 per contract!
Sovereign Bancorp Inc (SOV) $12.96 +3.93%
SOV has been on a tear amid takeover chatter and recovery in the financial sector, climbing 30% from $10 in just 9 days.
Todayís option volume continues a bullish trend, with calls dominating and buyers continuing to focus on out-of-the money strikes. Todayís volume is triple recent averages, and virtually all of the 18,000 contracts are calls.
This includes some multi-market sweeps to purchase Jan-09 17.5 calls in a view that the stock may have much further to climb.
Posted By: Trade Alert
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About Henry Schwartz
Henry Schwartz has traded derivatives on US and European exchanges for nearly 20 years. His experience includes market-making and institutional trading at the Hull Group, Salomon Brothers, Bear Stearns and most recently Banc of America Securities, where he led the electronic market-making project coincident with the launch of the ISE. His current work involves real-time stream analysis of options market activity for a number of leading institutional sell-side firms.
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